Message from the Vice Chancellor: Federal expense reductions and VUMC

Dear Colleagues:
I write to you in the wake of a series of immediate federal expense reductions, known as the “sequester.” True, the country is grappling with a federal debt load that is unsustainable, and reversal of this trend is essential to our country’s future.

As I have communicated over the past few years, the federal budget challenges harken a new and more cost-conscious day in health care and the biomedical sciences. At Vanderbilt we have not been unaware — for more than two years, across the Medical Center, we have taken important steps to lower our costs while raising quality and improving value.

However, the immediate reductions we are now seeing due to political gridlock in Washington are so draconian, few in positions of responsibility in government, industry or academia believe they should occur.

Nonetheless, on Friday these reductions were implemented and will force $85 billion in spending cuts over the next seven months. We have already begun to feel the impact, as have major health care centers all across the nation. Academic centers are experiencing these sudden cuts across all missions, from health care to research to education.

What does this mean for VUMC? To frame the situation, we need only look at our central missions and the extent to which they are supported by the federal government. Our largest volume of activity is the provision of health care, involving the efforts of 16,000 faculty and staff. Nearly half our patients are insured through federal programs — either Medicare or Medicaid (TennCare) in roughly equal proportions. Absolute reductions in payments through both programs are being felt acutely across our children’s and adult hospitals and outpatient clinics.

At the same time, lump sum disproportionate share (or DSH) payments are ending this year. All teaching hospitals have historically received DSH payments to partly offset the unrecovered costs of treating the uninsured, a population representing nearly 8 percent of our entire patient volume.

Whether we will recover some of these funds through the expansion of TennCare via the Affordable Care Act (ACA) remains very uncertain. The U.S. Supreme Court ruled that states can opt out of key provisions of the ACA, including Medicaid expansion.

With sequestration likely to trigger as many as 2 million job losses throughout the country, including industries in Tennessee, VUMC is likely to see even more patients without insurance. America’s 400 major teaching hospitals manage nearly half of the nation’s uninsured patients in less than one-tenth of the nation’s health care facilities, and are therefore most impacted by economic downturns caused by unemployment. At VUMC, our uninsured care costs have been continuously rising since the recession began in 2008, and in this fiscal year will exceed $400 million.

Our second largest source of revenue supports the research mission.

VUMC is a national leader in the most cutting-edge arenas of discovery science aimed at improving the health of all people. An additional 5,000 people work at VUMC in support of our research mission. We are among the nation’s 10 largest recipients of peer-reviewed funds from the National Institutes of Health (NIH). The NIH is by far the largest agency, public or private, funding research in the United States. Nearly 70 percent of our $500 million of annual research funds are provided through this federal agency.

Sequestration requires the NIH to immediately reduce its expenses, and our scientists are already seeing major reductions in the funds coming to them through grant awards, as well as reductions in the availability of new grants.

Thanks to your tremendous efforts, we have been successful over the past 18 months in removing nearly $40 million in annual expenses, without a significant reduction in workforce, putting us in a strong position relative to many of our peers.

However, over the coming months we will be hit by approximately $50 million in additional reductions to revenue. Hence, to assure we continue to fulfill our vital missions and avoid or minimize workforce reductions, we must further reduce our expenses by a similar amount. In order to assure we are in the strongest position to withstand these challenges, we will immediately engage in these efforts.

Our leaders will be working with you directly to identify expense reductions and immediately recognizable efficiency and revenue opportunities across all mission areas.

At times like these, our core values become more important than ever. After 20 years as a student and later a faculty member at Vanderbilt, I know above all else that Vanderbilt values people — the people working and learning here, as well as the patients we serve each day — most highly. At VUMC, our central missions express those values — patient care that is both compassionate and extraordinary in quality, research that benefits humankind, and education that assures we are creating the next generation of clinicians and scientists.

As we all work together to preserve and defend what matters most, I would ask us all to remember the following over the coming days and months:

1) Vanderbilt is a timeless institution with an incredibly strong worldwide standing and financial base. The Medical Center is strong and becoming stronger as a nationwide leader. During times of adversity, it is the strong that not only survive, but also thrive. In a time of uncertainty and spending reductions in science and health care, there are only a handful of institutions in the country as strong and capable of navigating stormy seas as Vanderbilt.

2) Sacrifice in a time of scarcity is inevitable. For Americans, this is such a time, and as an institution focused on health care and research, we are front and center. There are just a few people working at VUMC today who experienced the Great Depression firsthand, so most of us have little long-term historical experience or context for significant and absolute reductions to our major revenue streams. Preserving the mission-critical activities we all believe are most important will require all of us to tighten our belts.

3) Our most valuable asset is our Vanderbilt culture. Whenever people come here from other cities, countries, universities and health care institutions, our caring culture, filled with warmth and generosity, is the first attribute people notice and remark upon. As we work together to do the difficult things we instinctively know are essential — become even more cost effective through innovation and work redesign, eliminate redundant infrastructure through resource sharing across operating units, and in some cases slow the growth or downscale programs that are not essential to our success — we must approach these challenges as a thoughtful and virtuous organization.

I will communicate with you regularly as we engage the financial headwinds rippling throughout the nation’s economy. I am confident that we will emerge even stronger. And we will continue to lead the nation’s efforts to discover, implement and teach the most cost-effective and caring ways to improve the health of Vanderbilt patients and people everywhere.

Thank you for your support of these efforts. I’m sincerely grateful for all you do for Vanderbilt.